Question

Swift Oil Company is considering investing in a new oil well. It is expected that the oil well will increase annual revenues by $122,610 and will increase annual expenses by $72,000 including depreciation. The oil well will cost $471,000 and will have a $11,000 salvage value at the end of its 10-year useful life. Calculate the annual rate of return. (Round answer to 0 decimal places, e.g. 13%.)

Answer 1

21%

Step-by-step explanation:

The formula to compute the annual rate of return is shown below:

= Annual net income ÷ average investment

where,

Annual net income equal to

= Annual revenues - annual expense

= $122,610 - $72,000

= $50,610

And, the average investment would be

= (Initial investment + salvage value) ÷ 2

= ($471,000 + $11,000) ÷ 2

= $482,000 ÷ 2

= $241,000

Now put these values to the above formula

So, the rate would equal to

= $50,610 ÷ $241000

= 21%